Company: Carlsberg Brewery Malaysia Berhad (2836)

When you scrutinize Carlsberg's annual report, you simply cannot avoid to notice its 10 years of healthy growth in revenue and profit. There was also a remarkable recovery story of profit margin since 2009 (9.8%) until 2012 (15.5%). Year 2012 was the first year that the company's profit margin surpassing its old profit margin of 15.2% in 2003.

Here are a few salient facts:

• It pays most of its profit after tax to its shareholders as dividend. The two exception years in 2009 and 2010 were due to payment made for the acquisition of Singapore business. We can expect consistent dividend payment
• There were reasonable growth in revenue, profit and dividend
• In 2012, subsidiary in Singapore contributed 23% and 30% of overall revenue and profit respectively. Singapore's profit margin is higher than that in Malaysia. We simply cannot ignore the Company's business in Singapore's in our analysis.

10 year financial performance extracted from Carlsberg's Annual Report 2012

From the 10 Year Financial Summary extracted from its Annual Report, 2010 was a watershed year that we see significant improvement in almost all of its financial indicators, i.e. 31% revenue growth, 72% profit growth, 31.5% profit margin improvement to its double digit percentage of 12.9%, dividend growth, etc. There were two major events during these period with significant financial improvements:

• The acquisition of Singapore subsidiary was completed in Oct 2009. Year 2010 was the first year that included full year performance of Singapore subsidiary
• A new MD, Mr Soren Ravn, were appointed in March 2010. (He was transferred as Chief Executive Officer of Carlsberg Greater China in July 2013)

Financial Positions

The balance sheet was well managed. Despite the growth since 2009, trade debtors and inventory turnover improved!

Improved trade debtors and inventory turnovers despite significant growth since 2009.

A well managed balance sheet's items like trade debtors, inventory and creditors usually means:

• it is unlikely that the company maniputes its income statements numbers. This means the profit figures are reliable as performance indicators.
• operational management is good. (Therefore debts collection is quick, stocks level is low and payment to creditors is fast.)
• Tight credit control

It indicates a really good and professional management team behind this company.

• Positive cash flow from operations and after capital expenditure
• Very little borrowings and only to facilitate short term working capital
• Simple balance sheet that devoid of chance of manipulation

Why I follow this company?

1. Consistent performance of profitability and growth for both revenue and profit.
2. Professionally managed operations and finances that reflect in balance sheets.
3. Strong and improving profit margin.
4. Cash rich and cash generating. Pays most of their net profits as dividend to shareholders. 
5. Sustainable and growing dividend at reasonably yield (4% as at 26/8/2013)
6. Strong brand names
7. Malaysia's demography, a nation with growing populations (include non Muslims)

What are the concerns or risks investing in this company:

• 30% of profit came from Singapore's subsidiary, yet the profit margin from Singapore business fell to 20.1% in year 2012 from 22.0% of year 2011. (Malaysia profit margin is much lower at 12.7% and 13.9% for 2011 and 2012 respectively.)
• The growth of Singapore business had slowed down in year 2012
• Its business affects by general economy performance
• Tiger, its competitor's brand, had been gaining ground
• Its current valuation based on historical earning PE ratio is very high at 23.79

In a duopoly market, one cannot gain a full perspective of Carlsberg business and prospects without looking at its main competitor, i.e. GAB. But I will have to leave this part out until next time.

Segment results

I think this Company is worth following and that its shares are worth buying. The key point is, therefore, at what price?

The complicated issues in valuing Carlsberg stock are

• Current PE is too high, but does it matter? As the dividend is being paid at 4% yield, sustainable and probably growing. 
• The stock is a dividend play with growth factor. In dividend play, growth is the major factor in determine price and return. Can the growth continue? and at what rate? 
• Major change in leadership in July 2013, can the good performance and trend continue?

And at this point, the market is expected to plunge within the next few months.

I will write the valuation analysis in my next post on Carlsberg. Meanwhile, Carlsberg will be in my watch list and I will continue to find pricing opportunity to buy into this stock.